Diebold performing well despite grim economy

Monday

Aug 25, 2008 at 12:01 AMAug 25, 2008 at 6:25 PM

Diebold President and CEO Thomas Swidarski has seen his company beat its financial goals. It is on track to cut $100 million in costs by year’s end. All he wants to do now is cut another $100 million, while moving the company further in the service end of its core businesses.

G. Patrick Kelley

Diebold President and CEO Thomas Swidarski has seen his company beat its financial goals. It is on track to cut $100 million in costs by year’s end.

All he wants to do now is cut another $100 million, while moving the company further in the service end of its core businesses.

Swidarski had to hold his tongue about his company’s performance for more than a year while Diebold worked out accounting problems with the Securities and Exchange Commission and Department of Justice.

But on Aug. 11, Swidarski got to break his silence, announcing that the company was not only meeting its targets, but exceeding them. After that, he visited Boston and New York to meet with the company’s largest shareholders for the first time in 15 or 16 months.

“It seemed like a lot longer than that,” Swidarski said. “The good news was, everyone was surprised and encouraged by the results.”

Accounting changes the company had to make required it to restate its financials and stopped it from reporting results. Unfortunately, about the time Diebold had to go quiet, “banks stocks, which we’re closely tied to ... really headed south,” Swidarski said.

Although Diebold wasn’t hurt by the mortgage or credit crisis, “It affects perceptions, since we didn’t have any results. The good thing was, when folks actually saw the results, the results speak to a very healthy environment for us.”

Earnings are up, and profits are well above last year. How can that be with so many financial institutions in the United States struggling? Because Diebold is tied to the retail side of banking. Although different banks have different strategies, when there are problems with commercial lending or mortgage “people tend to go back to retail banking, which is the bread and butter of branches,” Swidarski said.

Also in Diebold’s “sweet spot” is security in branches and automation in banking, “which is why we were not only able to come into the year and surpass revenue guidance, but now we had to increase revenue guidance,” Swidarski said.

“Management meetings we attended this week significantly increased our confidence in Diebold’s ability to achieve its goals for this year and next, and in management’s ability to continue to make the appropriate decisions for its shareholders,” Wedbush Morgan Securities analysts Gil Luria and Nick Setyan told customers. “We expect to raise our price target and reevaluate our rating once Diebold’s SEC filings are up-to-date and the overhang of United Technologies’ unsolicited bid is removed.”

On March 2, United Technologies Corp. made an unsolicited $40 per share bid for Diebold stock. The Diebold board rejected the offer as undervaluing the company.

“Coming into this year, we were able to say, ‘Here’s what we think revenue expectations are,’ and we’ve already surpassed those, so we had to increase revenue guidance for the remainder of the year,” Swidarski said.

The second piece the investment community was pleased with was the margin improvement.

“We’re growing revenue and more importantly, we’re continuing to be very focused in terms of the other aspects of running the business, thus the margin’s improved a little bit,” Swidarski said. “That’s a big indicator for those folks.”

In 2006, when he took over, Swidarski made margin targets of 7 percent for 2008, 9 percent in 2009, and 10 percent in 2010.

“Not only are we going to hit the target we laid out, I’m expecting to exceed that number this year. We had put that 7 percent target out there, and we’ll be north of 7 this year.”

The “cost takeout” is the company’s effort to cut annual costs by $100 million by the end of 2008. There is $35 million left to take out this year.

“So we’re very confident by the end of this year we’ll have taken $100 million in costs out of the structure,” Swidarski said.

“Probably the frustration over the last 15 months for me personally, has been internally I could see the progress, quarter-by-quarter. I couldn’t say anything externally, so externally, people are questioning how we are doing.”

“Our other key message when we talked to them (analysts)) was, of the people in our industry, we’re the ones doing the most, relative to moving into service and services.

Fifty-five percent of Diebold’s revenue is from service now, and Swidarski said that will increase.

“That’s a recurring revenue and that’s a very positive thing viewed from the folks on Wall Street,” he said.

It fits in well with makeup of Diebold because it has very big service infrastructure in the U.S. and other countries. “We’re just going to keep building upon that, regardless of the technology. “I don’t know what the technology will be in 10 or 15 years, hopefully we’re inventing it as we speak, but we’ve got the infrastructure to support it and grow it.”

That service doesn’t just mean repair. The company also monitors security at more than 50,000 locations throughout the country, including banks and national retail chains.

“People trust us, and they’ve trusted us for a long time to take care of their situations,” Swidarski said. “Now what we’re seeing is rather than just fixing something that’s broken, identifying things on the front end, and that’s really what monitoring is about.”

Smaller banks also are beginning to outsource their ATM network to Diebold.

“What they’re basically saying is, ‘We’re going to turn over an ATM network to you, you manage it, run it, we’ll pay a monthly fee rather than us buying equipment and installing it.”

The financial restatements coming in September aren’t expected to make large changes, and money will be shifted to different quarters, to clear things up on how the company books revenue.

Won’t the success and clear financial situation make Diebold more attractive to United Technologies?

“Well, I guess that’s the good and the bad news,” Swidarski said. “Diebold has a very good brand and a very good reputation. I guess the good news for me is validation that we’re a very capable company.

“We got a validation ... that the $40 a share doesn’t value the company for what we’re really worth. It’s one thing for me to say it, and it’s another to say ‘Here’s our financials.’ When you look at the financials, everybody comes up with the same conclusion. ‘Uhhh, that doesn’t feel like the shareholders get a fair shake there.’

“We can only control what we can control, which is the operations and performing well in the operations. If we do that, shareholders win. It doesn’t appear that they’re the kind of company that’s going to raise their offer an enormous amount.

“Our results suggest the valuation’s far north of where they started and all I worry about is continuing to keep ourselves focused on doing what’s right. But bookkeeping problems are nothing to the trouble that Diebold’s elections business has wrought. Accusations from incompetence to election-rigging are common on the Internet. The company has said it’s continuing to support the business, renamed Premier Election Systems, but it’s looking at alternatives.

The company has a number of subsidiaries it may not keep long term, Swidarski said.

“Diebold has two fundamental core competencies, and there are things we’re going to add. Security and self-service are the competencies. We do other things, and over time, in Premier’s case, we’re looking at alternative ownership.”

In addition to changing the name from Diebold Election Systems, Premier has its own board to help make decisions, and is a stand alone entity, Swidarski said.

“I think ownership by someone else for that group would be best served for their industry, for what they do and for Diebold.”
It’s not time to sit still, Swidarski said. “We’re talking about making changes to the manufacturing footprint and we’re talking about making changes to the warehouses throughout the United States.”

The company has about 90 warehouses in the U.S. “We’re taking that to three big ones.”

There also are plans to become more efficient on manufacturing side. Opteva customers today may have 25 options in any number of features.

“So you end up with this endless permutation. We’re now going to 25 standard packages. We’re going to streamline that.”

The company looked at ATM orders for the last three years, and almost 99 percent were in the 25 standard packages.

“We’ve made it complicated for ourselves and now we have the inventory with all this stuff. Our job is to eliminate waste and be more efficient.”

And he plans to bring costs down significantly.

“We’re saying we’re going after another $100 million by the middle of 2010,” he said. About $70 million of that will come from streamlining and warehouses.